‘Down down’ and ‘cheap cheap’ are gone gone: why supermarkets are moving away from price

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Coles was once the market leader thanks to its ‘down down’ low pricing marketing.

Gary Mortimer, Queensland University of Technology and Louise Grimmer, University of Tasmania

On January 26, 2011, Coles fired the first shot in what would soon be dubbed the “supermarket price wars” by reducing the price of its own-brand milk to A$1 per litre. Woolworths fired back, triggering seven years of intense price competition.

But now Coles has waved the white flag, indicating a move away from price-based marketing, to a focus on other attributes, such as sustainability, local produce and community.

Coles’ new ad campaign.

Research shows if price is the main selling point, shopper loyalty decreases and customers become more conscious of price. Price wars are also costly for retailers.

While operational costs (wages, rent, bills) remain fixed or go up, prices can’t keep coming down. You eventually run out of margin.

Coles recent half yearly results reflect this, with a drop in earnings of 14.1% from A$920 million to A$790 million.

In contrast, Woolworths announced an 11.1% increase in earnings for their supermarket business. But Woolworths dropped their “cheap, cheap” price cutting campaign nearly two years ago.

Read more:
Down, down but not different: Australia’s supermarkets in a race to the bottom

Other retailers also get caught in the cross fire of price cutting. Case in point is Aussie Farmers Direct, which fell into administration this week saying they were:

…no longer able to compete against the domination of the major two supermarkets.

While it may be overly simplistic to blame the two big supermarkets for the downfall of Aussie Farmers Direct, price conscious consumers and thin grocery margins certainly contributed.

How this strategy came about

Supermarkets are now looking beyond price to stand out.

Both Coles and Woolworths are very similar in the brands they offer, prices, layouts, weekly specials and online channels. The move away from price gets shoppers thinking about what is unique to each chain.

So, rather than price, the focus has shifted to service quality, social programs and connecting with the community.

Read more:
Unit pricing saves money but is the forgotten shopping tool

Shoppers who are continually exposed to loyalty program logos, may eventually stop noticing these logos, or “switch off”. This is because of a behavioural tendency called “habituation”.

What these new strategies are trying to sell

So, if Coles are no longer selling themselves on price, what are they selling?

Coles’ new approach is more subtle, selling themselves through aspirational stories and employing classic advertising techniques to do it.

These techniques are used in advertising to convey positive feelings and emotions associated with a particular experience. A simple way to achieve this in advertising is to feature people telling their own stories – as seen in the new Coles advert launched this week.

Woolworths ad campaign.

With the Commonwealth Games near, both supermarkets are also featuring sports stars in their marketing. Woolworths new campaign features athletes and their connection with fresh food, positions the company, once again, as “Australia’s Fresh Food People”.

Meanwhile, Coles have partnered with Uncle Toby’s for their Sports for Schools campaign. Their advertisements feature an array of young, fit, attractive and successful athletes linking the athletic success with the purchase of products from Coles.

By moving away from price and focusing on a story telling strategy, both supermarkets can engage consumers with a process called “internalisation”. This is where people accept the endorser’s position on an issue as their own.

Internalisation is a powerful psychological mechanism because even if the source used in the campaign is forgotten, the internalised attitude usually remains. Price doesn’t create this effect.

While food prices won’t necessarily go up any time soon, consumers shouldn’t expect to see any further significant price drops. Instead, Coles and Woolworths will draw attention to other important attributes.

The ConversationFaced with the expansion of Aldi across South Australia and Western Australia and the entry of German supermarket Kaufland, Coles has recognised they can’t keep fighting a battle on price alone.

Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology and Louise Grimmer, Lecturer in Marketing, Tasmanian School of Business and Economics, University of Tasmania

This article was originally published on The Conversation. Read the original article.


Failure to curb tax concessions will put increasing burden on ordinary workers: Bowen

Michelle Grattan, University of Canberra

Shadow Treasurer Chris Bowen will target tax loopholes and concessions in a speech on Monday, arguing that the economic case for budget repair has never been stronger.

Countering government criticism of Labor’s proposed crackdown on concessions, Bowen will say an important part of sensible fiscal strategy is to identify tax concessions that “eat away at the revenue base” and reform or abolish them, so as “to underpin both budget repair and the funding of new initiatives”.

The opposition has announced moves that would hit negative gearing, capital gains discounts, and trusts.

Bowen says in his speech to the Per Capita think tank – released ahead of delivery – that failure to reform negative gearing and family trusts will put increasing tax pressure on low- and middle-income earners.

He says analysis by the Parliamentary Budget Office shows that for the middle income quintile, with people earning A$46,000, average tax rates are set to rise more strongly than for any other group.

“Every dollar not recouped through winding back these loopholes and concessions is another dollar that Australian workers will have to shoulder.”

Bowen says that instead of closing loopholes and strengthening the tax base, the government would prefer to increase income taxes by $44 billion, hitting all workers earning more than $21,000.

“At a time when wages are growing at record low rates this is a tax hit that will see someone earning $70,000 with $350 less in their pocket from next year.

“Meanwhile the tax base remains full of holes and tax concessions and other loopholes go unreformed,” he says.

“Using an infamous metaphor of the treasurer’s, the government has barely even taken a scalpel to tax concessions which largely accrue to wealthier Australians”.

Half of all the benefits of negative gearing accrue to the top 10% of income earners, as do 80% of the benefits of capital gains, and trusts are used as income-splitting tools by high-income earners, Bowen says.

Labor’s planned negative gearing reform would be good for the budget as well as for first home buyers, he says. By the end of decade Labor’s negative gearing and capital gains tax reforms would together be adding $8 billion annually to the budget.

Bowen attacks Treasurer Scott Morrison over the “ridiculous argument” that the company tax cuts are funded because they are in the budget.

“Simply ensuring that the budget bottom line reflects the cost of the tax cuts does not mean they are funded. The fact is that the budget would be $65 billion better off over the decade if the [company] tax cuts weren’t proceeded with.”

Bowen says Morrison undermines his own argument that Labor did not fund the NDIS. “Of course NDIS and the Gonski schools funded model were both reflected in Labor’s budgets. Putting aside the fact that Labor in government made other cuts and revenue decisions to fund both initiatives, even if we hadn’t, by the treasurer’s logic, they were funded because the budget bottom line reflected them.

“The treasurer has killed his own scare campaign on NDIS funding.”

This $65 billion tax cut “puts the medium term budget at risk”, Bowen says. At the end of the plan’s proposed ten years, the tax cut would be costing an annual $15 billion. “It is a fiscal ram-raid.”

So far the government has only been able to legislate the cut for firms with annual turnovers up to $50 million. The Senate has not agreed to the reduction for big companies. Labor has said it accepts the cut for firms with turnovers up to $2 million but has not announced yet what it would do about the legislated cut for firms with turnovers between $2 million and $50 million.

“Labor believes in strong fiscal policy and return to surplus and we are prepared to make the tough decisions to do it,” Bowen says.

“I believe in the return to surplus when conditions allow because locking in the AAA rating reduces borrowing costs and gives more room to fund important social initiatives.

“The progressive case for return to surplus also recognises that this would give me and future treasurers more room to move if we face another global downturn.

“The economic case for budget repair has simply never been stronger.”

Bowen says Labor’s policy work has been thorough and he promises “more detailed policy announcements” to come.

“We’ll continue to outline our plans from opposition, seeking a mandate and the moral authority in government to do big and important things.”


Malcolm Turnbull’s lead over Bill Shorten as better prime minister has narrowed to two points in Monday’s Newspoll in The Australian.

In mid-February Turnbull led 40-33% on this measure; now he is ahead by just 37-35%. In face of continuing bad polls, the Liberals have always taken heart that Turnbull does better than his opponent in the head-to-head comparison, so the tighter margin will inevitably be of concern to them.

The ConversationLabor’s 53-47% two-party lead is unchanged.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Viewpoints: could Labor’s tax changes make the system fairer or hurt investors?

Danielle Wood, Grattan Institute; Brendan Coates, Grattan Institute; Gordon Mackenzie, UNSW, and John Daley, Grattan Institute

The Australian Labor party will scrap a system that refunds more than A$5 billion a year to low or zero tax paying investors, should they win government.

Franking credits” are designed to stop tax being paid twice on Australian corporate profits, allowing shareholders a credit for the tax paid by the company. But when shareholders don’t pay taxes at all they can claim a cash refund for unused credits from the tax office.

Scrapping cash refunds on unused franking credits could make the tax system fairer according to Danielle Wood, Brendan Coates and John Daley from the Grattan Institute.

But according to Gordon Mackenzie from UNSW, these cash refunds incentivise people to invest in Australian companies, and ending them could see super and self-managed super funds, in particular, pulling their investment from local companies.

Labor proposes to abolish cash refunds of unused franking credits for individuals and superannuation funds. Not for profits and universities, which do not pay income tax, will continue to receive cash refunds for franking credits.

A piecemeal move towards a fairer tax system

Danielle Wood, Brendan Coates and John Daley, Grattan Institute

Labor’s proposal is not comprehensive tax reform. But in the absence of that holy grail, it is a piecemeal move towards a more equitable tax system. The change will primarily affect wealthy retirees.

The wealthiest 20% of retirees own 86% of shares held by older Australians outside of super. And among self-managed superannuation funds (primarily held by wealthier retirees), half of the refunds are currently going to people with balances over A$2.4 million.

Abolishing cash refunds for individuals and superannuation funds will raise about A$5 billion a year in extra revenue. About 33% will be paid by individuals (mostly in high wealth households), 60% will be paid by self-managed superannuation funds (typically held by wealthier retirees), and the remaining 7% will be paid by Australian Prudential Regulation Authority regulated superannuation funds.

ABS Survey of Income and Housing 2015-16, Author provided

Cash refunds on franking credits were introduced in 2001 for shareholders who had more franking credits than the tax they owed. The theory was that people with no or low income should have the same incentives to invest in Australian companies as other investors.

At the time, the decision cost the budget little – around A$550 million a year – because very few people with low income also owned shares.

But new superannuation rules in 2006 relieved retirees from paying any tax on their superannuation withdrawals. Retirees also pay no tax on their super fund earnings. As more people with significant super balances retire, an increasing number qualify for cash refunds on unused franking credits.

And a series of changes to the Seniors and Pensioners Tax Offset increased the proportion of over-65s paying no tax on earnings outside of super.

The cash refund system now costs the federal budget more than A$5 billion a year. But abolishing cash refunds on dividends won’t be costless.

The franking credit regime was set up for a variety of good reasons. It aimed to bias Australians towards investing in Australia. In practice this appears to have led to Australian companies being funded more through equity and less through debt, improving financial stability.

In theory it would also lead to more physical investment in Australia, although there is less evidence that this has happened.

In practice, franking credits also encourage Australian companies to pay dividends rather than inefficiently hoard cash or invest in low-return projects.

Read more:
How the government can pay for its proposed company tax cuts

So abolishing cash refunds, but keeping franking credits for those who do pay income tax, is probably not the ideal policy. It abandons the principle that all company profits should be taxed at an investor’s marginal rate of income tax. And it reduces the incentive for retirees to invest in companies from Australia rather than overseas.

On the other hand, the decisions not to tax superannuation withdrawals and to increase the effective tax-free threshold for older Australians have led to wealthy retirees contributing very little to government revenues relative to younger households.

Even though the wealth of older generations has jumped in line with asset prices, the share of senior Australians who pay income tax has nearly halved – from 27% to 16% – in the past two decades.

In an ideal world the federal government would reintroduce a number of higher income and wealthy older Australians to the tax system by taxing superannuation earnings and abolishing age-based tax rates. But in the absence of the political will to make these changes, abolishing cash refunds provides a big boost to the budget bottom line from more or less the same group.

The changes could bring distortions to investors

Gordon Mackenzie, Senior Lecturer, University of New South Wales

Chasing franking credits is one of the few tax issues that super fund investment managers take into account when investing, and is a significant consideration for self-managed super funds, according to my research with Professor Margaret McKerchar.

As the previous authors mention, franking credits are intended as an incentive for certain investors to invest in Australian companies. Under the rules, super funds and self-managed super funds don’t pay tax when they are paying a retirement pension, if the account balance is below a certain level.

Since they pay no tax, it is worthwhile for these funds to invest in Australian companies that will pay franking credits. Doing so allows them to claim credits from the tax office.

But this also means that if cash refunds on franking credits are done away with, it is an implicit 30% tax increase on super and self-managed funds that invest in Australian companies. This creates an incentive for them to put their money elsewhere.

If these funds invest in something like a government bond then they will pay no tax on the profits. If they invest in an Australian company, the company will pay the corporate tax and there will be no way for super funds to claim the tax back.

Read more:
Tax reform aside, there’s no real case to kill off dividend imputation

Many self-managed super funds have accounts for paying a pension to the member and another account for accumulating funds, but not paying out anything. Self-managed super funds will likely replace Australian shares in their pension accounts with assets such as bonds or managed funds.

This is important, as data shows that Australian shares are one of the largest asset classes held by self-managed super funds, ranging between 21% and 30.8% of the entire portfolio, depending on the size of the fund.

The response of other types of superannuation funds will probably be more muted. While they do value imputation credits, they also care about diversifying their portfolios – there will still be benefits to holding some Australian shares.

The ConversationOverall, then, imputation credits are important to superannuation funds, both big and small. The refund not only makes certain types of investment attractive, but also drives how much is invested in that type of investment.

Danielle Wood, Program Director, Budget Policy and Institutions, Grattan Institute; Brendan Coates, Fellow, Grattan Institute; Gordon Mackenzie, Senior Lecturer, UNSW, and John Daley, Chief Executive Officer, Grattan Institute

This article was originally published on The Conversation. Read the original article.


Why Trump’s tariffs will have little impact on Australia and a trade war is unlikely

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Donald Trump has announced import tariffs on steel and aluminium.

Tony Makin, Griffith University

US President Donald Trump has levied a 25% tariff on steel and a 10% tariff on aluminium imported from all countries except Canada and Mexico. Trump had hinted that the trade protections would exclude Australia, but it wasn’t explicitly exempted.

Regardless, import tariffs on steel and aluminium will have only a small impact on the Australian economy, as Australia isn’t a large exporter of steel or aluminium. What Australia does export to the United States is covered by a free trade agreement.

Even though the European Union, China and other countries will have tariffs levied on their steel and aluminium exports, the US move is unlikely to escalate into a trade war. The World Trade Organisation has powers to sanction countries that arbitrarily impose tariffs.

And Trump’s justification for the tariffs in the first place, that the United States is losing something due to running trade deficits, has been thoroughly debunked by modern economics.

Read more:
America’s allies will bear the brunt of Trump’s trade protectionism

A tariff imposed on any good is an extra tax that raises its sale price equivalently, making it less attractive to buyers than the domestically made product.

There could be some concern if the United States extends tariffs to beef, other meat products, aircraft parts, pharmaceuticals and alcoholic beverages. These goods comprise the top five Australian exports to the United States and account for considerably larger trade volumes than steel and aluminium.

Yet there is no reason to expect tariffs will suddenly be imposed on these major exports, given the provisions of the Australia–United States Free Trade Agreement.

This agreement comprehensively covers trade in goods and services, as well as investment flows, between the two nations. It eliminated many of the pre-existing tariffs affecting trade.

US Vice President Mike Pence has even described this free trade agreement as “a model for the world”.


The World Trade Organisation to the rescue?

In 2002, President George W. Bush imposed tariffs of up to 30% on imported steel in the midst of major structural change in the US steel industry. Major steel exporters Canada and Mexico were exempt from the Bush tariffs under the provisions of the North America Free Trade Agreement.

The World Trade Organisation rejected the Bush administration’s claim that the tariffs were justifiable due to a surge in steel imports. The justification for the Trump tariffs is based on national security grounds, so it remains to be seen how the the World Trade Organisation will decide on the tariffs.

But there are grounds for hoping history will repeat and the World Trade Organisation will slap down the new tariffs, given the possible trade ramifications if countries retaliate with their own tariffs.

If the World Trade Organisation upholds the Trump tariffs, it could herald the end of the international trading system that has operated passably well over recent decades.

Trump’s new mercantilism?

Trump frequently laments the persistent trade deficits the United States runs against other major economies, notably China, Japan and Germany, and refers to these deficits to justify protectionist measures.

But this argument isn’t new – the idea that trade deficits are “bad” for an economy has been around since economics as an academic discipline began.

For instance, one strand of economics from Elizabethan England advocated achieving trade surpluses as the means to national prosperity. In the words of a leading proponent, Thomas Mun, it was necessary to “sell more to strangers yearly than we consume of theirs in value”.

But this doctrine has been soundly debunked, first by the father of economics, Adam Smith, and modern economic theory has since confirmed Smith’s position.

Read more:
There may be a silver lining to Trump’s trade policies

Modern economics shows that trade and current account deficits (a broader measure of trade that includes international money flows) are not problematic. This is because they are inflows of capital that can lead to increased domestic investment.

In other words, running a trade or current account deficit can actually assist economic growth, just as it has for Australia, by enabling lower long-term interest rates and higher capital accumulation than otherwise.

The major exception to this is when foreign capital inflow finances government budget deficits, thereby strengthening the local currency and worsening international competitiveness.

The ConversationIronically, the American manufacturing sector could suffer greater damage from lost international competitiveness than from cheap steel and aluminium imports.

Tony Makin, Professor of Economics, Griffith University

This article was originally published on The Conversation. Read the original article.


How the government can pay for its proposed company tax cuts

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The government is still attempting to lower the corporate tax rate to compete globally.
Ben Rushton/AAP

David Ingles, Crawford School of Public Policy, Australian National University and Miranda Stewart, Crawford School of Public Policy, Australian National University

There are ways the government can pay for a cut in the company tax rate. In a recent working paper, we worked with researcher Chris Murphy to model three different options: reforming Australia’s system of giving shareholders tax credits, allowing less tax deductions on interest for companies, and introducing a tax on the super-profits of banks and miners.

After taking economic growth into account, the budget cost of the tax cut could be net A$5 billion a year.

Read more:
Race to the bottom on company tax cuts won’t stop tax avoidance

In the US, a company tax cut to 21% continues an inexorable global trend of cutting rates, making international tax competition even more pressing. As our working paper noted, Australia’s rate is now higher than most other countries, making tax avoidance even more attractive and deterring inbound foreign investment.

A cut in the Australian company tax rate to 25 or even 20% is important because it will attract foreign investment, boosting wages and the economy in Australia.

Remove dividend imputation

Australia has an unusual system of integrated company and personal tax, called dividend imputation. It has been in place since the 1980s.

Australian shareholders receive franking (imputation) credits for company tax. If shareholders are on a personal tax rate less than 30%, they receive a refund.

The company tax cut could be financed by removing dividend imputation. Our modelling indicates a company tax rate of 20% would mean the government breaks even, while halving imputation could finance a 25% rate.

It would be simpler to abolish dividend imputation and replace it with a discount for dividend tax, at the personal level.

Read more:
Qantas and other big Australian businesses are investing regardless of tax cuts

Dividend imputation only makes sense if we assume Australia is a closed economy with no foreign investors. In reality, Australia depends on inflows of foreign investment. About one-third of the corporate sector is foreign owned.

The likely source of additional finance, especially for large Australian businesses, is a foreigner who does not benefit from dividend imputation. So the company tax pushes up the cost of capital and domestic investors benefit from franking credits for a tax they don’t actually bear.

But the politics of making a change to the system are difficult, because domestic investors, especially retirees on low incomes and superannuation funds would lose out. But this approach could benefit workers, jobs and Australian businesses.

Broaden company tax by removing interest deductibility for companies

Another approach is to remove or limit deductibility of interest for companies. This can raise the same revenue at a lower rate, by allowing less deductions. Excessive interest deductions are used by multinationals to reduce their Australian tax bill, as shown in the recent Chevron case.

This would be like imposing a withholding tax on interest paid offshore. We explore a comprehensive business income tax on all corporate income. Modelling shows that this tax would finance the rate cut to 25%.

The comprehensive business income tax raises some difficult issues for taxing banks. This is because their profit is interest income less interest expense.

But there are numerous policies to restrict interest deductions already in place, here and around the world. These restrictions could be expanded. For example the thin capitalisation rules limit of the amount of loans a business can have relative to equity.

We still need anti-abuse rules because businesses can use other methods to minimise tax, as canvassed by the OECD in its Base Erosion and Profit Shifting project, including transfer pricing, and deductible payments offshore for intellectual property fees.

A rent tax or allowance for equity

A third option for a company tax cut is to change to a tax with a lower effective marginal rate. This means that the return on a new investment is taxed less heavily than under a company income tax.

We could introduce an allowance for corporate equity, or corporate capital, which provides a deduction for the “normal” or risk-free return for capital investment. This is also called an economic rent tax because it only taxes the above-normal profit.

Modelling shows that the allowance for corporate capital encourages new investment, which helps economic growth, but there is a large budget cost. The extra deduction reduces the overall tax take and so a higher rate is needed for the same revenue.

It is unlikely Australia would want to maintain or increase our company tax rate, as this directly contrary to the global trend and can lead to even more tax planning by businesses.

For Australia, a supplementary rent tax aimed at the financial and mining sectors – where above-normal returns are known to occur – could be combined with a lower company income tax. Modelling this option for the finance sector shows a large welfare gain and sufficient revenue to fund the rate cut to 25%.

The government has a lot of choices

We show that the government has many options available to finance the needed corporate rate cut and improve efficiency of the company tax.

Policymakers could mix and match these options. Dividend imputation could be replaced with a discount and combined with a comprehensive business income tax. Limits on interest deductibility could be combined with a part allowance for corporate capital.

The ConversationReplacing dividend imputation with a dividend discount at the personal level could be the best initial step. Other options for major reform of Australia’s company tax need to remain on the table, as company taxes drop to a new low and systems are reformed around the world.

David Ingles, Senior Research Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University and Miranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

This article was originally published on The Conversation. Read the original article.


Global Corruption


There isn’t solid research or theory to support cutting corporate taxes to boost wages

Fabrizio Carmignani, Griffith University

The argument that cutting the Australian company tax rate will lead to higher investment and wages, more employment and faster GDP growth does not have solid empirical or theoretical backing.

A close look at the economic research in this area shows a lack of consensus. Different studies, looking at different samples of countries, over different periods of time, reach different conclusions.

And the predictions made by theoretical models are sensitive to the underlying assumptions and structures built into the models themselves.

Many of the issues surrounding tax cuts remain unsettled – such as the size or length of the impact, how it affects inequality and the relationship with other government policies.

Read more:
Qantas and other big Australian businesses are investing regardless of tax cuts

The recent International Monetary Fund (IMF) forecast for the American economy highlights some of the issues.

In short, the IMF acknowledges that the recent US tax cuts will have a positive impact on economic growth in 2018-19. However, this is conditional on the US government not cutting expenditure, is likely to be short-lived, and will come at the cost of increased government deficits.

In this light, corporate tax cuts seem to be a long-term pain for a short-term gain, which is probably not what we need in Australia.

Conflicting information

Let’s start with the point that is probably least controversial – that a reduction in the corporate tax rate will lead to an increase in wages.

Think of the output produced by a corporation as a pie. This pie is shared among shareholders (in the form of dividends), banks and other lenders (in the form of interest paid on loans), workers (in the form of wages) and the government (in the form of taxes).

If we reduce the government’s share then there is more for everybody else, including workers. And some data do suggest that wages increase when corporate tax rates decline.

Yet economists disagree on the extent to which wages would actually increase in response to a tax cut.

Some research suggests that this increase might be small, even in a country like Germany, which is often used as an example of the beneficial impact of tax cuts on wages.

Certain aspects of the German economy and industrial relations system make it more likely that German workers will benefit from corporate tax cuts compared to Australian workers.

In Germany, workers’ representatives sit on company supervisory boards, which monitor and appoint members of management boards.

This means German workers have a stronger say when it comes to sharing the pie. For any given decrease in the slice of the government, German workers are more likely to get a bigger slice for themselves. This is not necessarily the case in Australia.

It is therefore difficult to draw implications for Australia from studies that look at the experience of Germany or other countries with significantly different institutional arrangements.

Furthermore, the fact that wages should increase in response to a corporate tax cut does not automatically imply that other economic variables will also respond positively. For instance, the more wages increase in response to a corporate tax cut, the smaller the increase in employment is likely to be.

Read more:
The full story on company tax cuts and your hip pocket

This leads to an even more controversial question: what is the effect of corporate tax cuts on real economic activity, such as employment and GDP growth?

The trickle-down effect of corporate tax cuts rests on the idea that business investment would increase once taxes are cut, which in turn leads to the creation of more jobs and faster economic growth.

However, this line of reasoning neglects the fact that investment decisions in today’s globalised world are not necessarily driven by the corporate tax rate.

Many other factors come into corporate investment decisions, such as the quality of institutions, the proximity to important markets, and the cost of labour (wages).

Because of these other factors, the impacts of tax cuts on employment and growth can be small, short-lived, or conditional on other government policy actions, such as managing debt.

In a similar vein, recent theoretical work that incorporates more realistic assumptions about the economy (such as the distribution of entrepreneurial skills in the population) suggests that a tax cut only has a significant impact on economic growth when the tax rate is initially high.

This means that even within a given country, the effect of a corporate tax cut can change depending on initial economic and policy conditions.

Putting tax cuts in a broader context

Beyond growth and employment, the effects of corporate tax cuts should also be considered in terms of deficit and inequality.

From the point of view of the public budget, a cut in the tax rate has to be somehow financed. How?

A first possibility is that the tax cut pays for itself. This is essentially the idea that as the tax rate goes down, the increase in the tax base (e.g. pre-tax corporate profit) is sufficiently large to ensure that the total tax revenue increases.

However, an increase in the tax base would require a significant and sustained increase in business investment, which, as we have already seen, does not necessarily happen.

The government could increase other taxes, but this means the government would effectively be taking from one group of taxpayers (possibly workers themselves) to give to corporations.

Another option is to reduce some government expenditures. But this could also involve taking from one group to give to another. If the decision is made to cut social welfare and public goods like education and health, then more vulnerable segments of the population will bear the cost of lowering the corporate tax rate. This means more inequality in the economy.

Of course the government could decide to just let the deficit be. This would result in higher debt. But can Prime Minister Turnbull (or President Trump for that matter) accept that?

The ConversationThe central economic challenge for Australia is to promote long-term, inclusive growth. Are we confident that this is what corporate tax cuts will deliver? Based on the economic research that I have read, the answer is no.

Fabrizio Carmignani, Professor, Griffith Business School, Griffith University

This article was originally published on The Conversation. Read the original article.


Blaming immigrants for unemployment, lower wages and high house prices is too simplistic

Robert Breunig, Crawford School of Public Policy, Australian National University and Mark Fabian, Australian National University

Australia should cut its immigration intake, according to Tony Abbott in a recent speech at the Sydney Institute. Abbott explicitly cites economic theory in his arguments: “It’s a basic law of economics that increasing the supply of labour depresses wages; and that increasing demand for housing boosts price.”

But this economic analysis is too basic. Yes, supply matters. But so does demand.

While migration has increased labour supply, it has done so primarily in sectors where firms were starved of labour, and at a time of broad economic growth.

Immigration has put pressure on infrastructure, but our problems are more a function of governments failing to upgrade and expand infrastructure, even as migrants pay taxes.

And while migrants do live in houses, the federal government’s fondness for stoking demand and the inactivity of state governments in increasing supply are the real issues affecting affordability.

The economy isn’t a fixed pie

Let’s take Abbott’s claims about immigration one by one, starting with wages.

It’s true that if you increase labour supply that, holding other factors that affect wages constant, wages will decline. However, those other factors are rarely constant.

Notably, if the demand for labour is increasing by more than supply (including new migrants), then wages will rise.

This is a big part of the story when it comes to the relationship between wages and migration in Australia. Large migrant numbers have been an almost constant feature of Australia’s economy since the end of the second world war, if not earlier.

But these migrants typically arrived in the midst of economic growth and rising demand for labour. This is particularly true in recent decades, when we have had one of the longest periods of unbroken growth in the history of the developed world.

In our study of the Australian labour market, we found no relationship between immigration rates and poor outcomes for incumbent Australian workers in terms of wages or jobs.

Australia uses a point system for migration that targets skilled migrants in areas of high labour demand. Business is suffering in these areas. Migrants into these sectors don’t take jobs from anybody else because they are meeting previously unmet demand.

These migrants receive a higher wage than they would in their place of origin, and they allow their new employers to reduce costs. This ultimately leads to lower prices for consumers. Just about everybody benefits.

Read more:
A focus on skills will allow Australia to reap fruits of its labour

There’s an idea called the “lump of labour fallacy”, which holds that there is a certain amount of work to be done in an economy, and if you bring in more labour it will increase competition for those jobs.

But migrants also bring capital, investing in houses, appliances, businesses, education and many other things. This increases economic activity and the number of jobs available.

Furthermore, innovation has been shown to be strongly linked to immigration. In the United States, for instance, immigrants apply for patents at twice the rate of non-immigrants. And a large number of studies show that immigrants are over-represented in patents, patent impact and innovative activity in a wide range of countries.

We don’t entirely know why this is. It could be that innovative countries attract migrants, or it could be than migrants help innovation. It’s likely that the effect goes both ways and is a strong argument against curtailing immigration.

Read more:
How migrant workers are critical to the future of Australia’s agricultural industry

Abbott’s comments are more reasonable in the case of housing affordability because here all other things really are held constant. Specifically, studies show that housing demand is overheated in part by federal government policies (negative gearing and capital gains tax exemptions, for instance) and state governments not doing enough to increase supply.

Governments have responded to high housing prices by further stoking demand, suggesting that people dip into their superannuation, for instance.

In the wake of Abbott’s speech there has been speculation that our current immigration numbers could exacerbate the pressures of automation, artificial intelligence and other labour-saving innovations.

But our understanding of these forces is nascent at best. In previous instances of major technological disruption, like the industrial revolution, the long-run effects on employment were negligible. When ATMs debuted, for example, many bank tellers lost their jobs. But the cost of branches also declined, new branches opened and total employment did not decline.

Read more:
New research shows immigration has only a minor effect on wages

In his speech, Abbott said that the government needs policies that are principled, practical and popular. What would be popular is if governments across the country could fix our myriad policy problems. Abbott identified some of the big ones – wages, infrastructure and housing affordability.

What would be practical is to identify the causes of these problems and address these directly. Immigration is certainly not a major cause. It would be principled to undertake evidence-based analysis regarding what the causes are and how to address them.

The ConversationA lot of that has already been done, notably by the Grattan Institute. What remains is for governments to do the politically difficult work of facing the facts.

Robert Breunig, Professor of Economics, Crawford School of Public Policy, Australian National University and Mark Fabian, Postgraduate student, Australian National University

This article was originally published on The Conversation. Read the original article.


China, North Korea and trade the key talking points when Turnbull meets Trump

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Malcolm Turnbull will be relieved to have some time away from the Barnaby Joyce affair when he arrives in Washington this week.
Reuters/Jonathan Ernst

Tony Walker, La Trobe University

Malcolm Turnbull was no doubt relieved when the prime ministerial jet lifted off from Australian soil yesterday, bound for the United States and his first formal round of discussions in Washington with an American president.

In Turnbull’s own words – applied to Deputy Prime Minister Barnaby Joyce’s domestic troubles – he will be hoping to leave behind a “world of woe”.

After a steadier start to the new year, the Joyce scandal, involving an affair with a political staffer, has cut the ground from under those improved prospects.

This has been reflected in the latest round of polling, which shows the Coalition slipping back against the Labor opposition. Turnbull’s own approval rating has taken a hit.

For these and other reasons, not least the need to establish a sound working relationship with a new administration, the prime minister will be looking to a circuit-breaker.

Read more:
Fischer calls for quick resolution of Nationals crisis, while Joyce is determined to fight to the death

Whether Turnbull’s “first 100 years of mateship” visit to Washington – with state premiers and business leaders in tow – provides a diversion from his domestic woes remains to be seen.

The hokey branding for the mission refers to the centenary of American soldiers fighting under Australian command on the Western Front in the Battle of Hamel in 1918.

In Washington, Turnbull’s discussions with President Donald Trump will focus primarily on China’s rise, the North Korean nuclear issue, and trade.

How to respond to North Korea’s provocations represents an immediate problem. But in the longer term, China’s expanding power and influence constitute the greatest security challenge facing Australia since the second world war.

In his public statements, Turnbull has been alternately hawkish and conciliatory toward Beijing, but it appears his instincts tend to align themselves with an American hedging strategy.

The Turnbull view of how to manage China’s rise was given particular expression in a speech in June 2017 to the annual Shangri-La Dialogue in Singapore. In this speech he called for “new sources of leadership [in the Indo-Pacific] to help the United States shape our common good”.

Turnbull’s Shangri-La speech was forthright for an Australian prime minister. He sharply criticised China’s “unilateral actions to seize or create territory or militarise disputed areas” in the South China Sea.

Beijing denies it, but it is clear it has been constructing a defence perimeter on islands and features in disputed waters. This prompted the following from Turnbull:

China has gained the most from the peace and harmony in our region and it has the most to lose if it is threatened … A coercive China would find its neighbours resenting demands they cede their autonomy and strategic space and look to counterweigh Beijing’s power by bolstering alliances and partnerships, between themselves and especially with the United States.

That speech was followed by increased efforts to expand a quadrilateral security dialogue between Australia, Japan, India and the US.

Turnbull’s visit to Japan in January for high-profile talks with Japanese Prime Minister Shinzo Abe emphasised shared regional security goals with other members of the so-called Quad.

What steps might be taken to further develop security collaboration between Australia, the US, India and Japan will almost certainly be on the table in Washington.

The Trump administration’s appointment of Admiral Harry Harris, the outgoing head of the US Pacific Command, as the ambassador-designate in Canberra is a signal of its intentions.

Harris has a hawkish view of China’s expanding influence in the Indo-Pacific. His participation in a security conference in Delhi in January along with Australian, Japanese and Indian naval commanders was significant in light of stepped-up efforts to bolster maritime collaboration between Quad members.

However – and this is a sizeable “however” – Turnbull needs to be careful not to be sucked into an American slipstream where China is concerned. Australia’s commercial interests dictate prudence in how it positions itself between a rising China and the US under an unpredictable Trump presidency.

The new US National Defence Strategy exposed differences between Canberra and Washington in their views of “revisionist” China and Russia as threats to US hegemony.

Foreign Minister Julie Bishop felt obliged to distance Australia from the Trump administration’s characterisation of attempts by China and Russia to “shape a world consistent with their authoritarian model”. She said:

We have a different perspective on Russia and China, clearly. We do not see Russia or China as posing a military threat to Australia.

Turnbull, for his part, provided a more nuanced response. He said:

We don’t see threats from our neighbours in the region but nonetheless every country must always plan ahead and you need to build the capabilities to defend yourself not just today but in 10 years or 20 years hence.

Australia’s 2016 Defence White Paper and 2017 Foreign Policy White Paper (the two documents should be read in conjunction) sketched out a future in which the country needs to buttress its defence capabilities in light of China’s rise.

Apart from China and related security matters, Turnbull will focus on trade in Washington. He will no doubt try to persuade Trump to revisit his decision to pull the US out of the Trans-Pacific Partnership trade agreement, now rebranded as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

The US withdrawal from the TPP, as one of Trump’s first executive acts as president, was disappointing. A trading bloc in the Indo-Pacific accounting for 36% of global GDP would have served as a counterweight to China’s surging trade and investment ambitions.

The revised CPTPP – including Australia, Japan, Canada, Mexico, New Zealand, Malaysia, Peru, Singapore, Chile, Vietnam and Brunei – remains significant. But clearly the abrupt US withdrawal has lessened its reach.

Significantly, Turnbull will discuss the CPTPP on the eve of the initialling of the agreement among the 11 remaining participants on March 8.

Trump has indicated he might be receptive to arguments for American re-engagement in the CPTPP process. However, this would require the renegotiation of provisions on such contentious issues as dispute settlements, copyright and intellectual property.

It is hard to see this happening in a timely manner. In a sense, the train has left the station.

Read more:
Trump and Turnbull have little cause for satisfaction over progress in Afghanistan

The Turnbull-Trump focus on China may also yield discussion about a competing regional infrastructure investment initiative to balance China’s “Belt and Road” program.

The latter is a vast Chinese infrastructure scheme. China is seeking to strengthen its influence in surrounding states by recycling a portion of its foreign exchange reserves in road, rail, port and other such projects.

It is not clear just how Turnbull and Trump might seek to provide alternative sources of infrastructure funding for projects to counter Chinese attempts to buy influence far and wide.

The ConversationSuch a scheme emerged from a pre-summit briefing in Canberra. The fact it is being floated attests to concerns in Washington and Canberra about China’s success in using its financial heft to extend its security interests.

Tony Walker, Adjunct Professor, School of Communications, La Trobe University

This article was originally published on The Conversation. Read the original article.


A public broadcaster that bows to political pressure isn’t doing its job

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The ABC’s independence is a global concern.
AAP/Joel Carrett

Johan Lidberg, Monash University

The ABC’s chief economics correspondent, Emma Alberici, did her job the other day. She wrote a well-researched analysis piece investigating whether the Turnbull government’s proposed company tax cuts would grow the economy and break Australia’s wages deadlock.

Alberici’s article came in for a lot of criticism from the Turnbull government for its one-sidedness and lack of balance. Later, the ABC took down the article from its website.

If you read her piece, you’ll see that, yes, she could have included more voices, and yes, the case for company tax cuts was forcefully argued against. But the argument and analysis was built on sound research, as Saul Eslake (one of Australia’s most senior and respected independent economists, who was quoted in Alberici’s story) has pointed out.

So, why on earth did ABC take the article down?

Part of the answer to this lies in the very editorial policies that are supposed to safeguard the ABC’s independence. The current wording of these polices function as a straitjacket on ABC journalists and make it hard for them to toe the line between analysis and opinion.

And that in turn makes the ABC look less independent.

High level of trust

One of the ABC’s greatest assets is the high public trust it enjoys compared to many of its commercial media competitors.

That trust is to a large extent built on the broadcaster maintaining and defending its independence from commercial, political and any other societal interests.

There are a lot of misconceptions regarding what a public broadcaster is. But one thing it is not is a government or state broadcaster.

There are certainly examples of some public broadcasters that are. One prominent recent case was when the Polish government in practice took control of the country’s public broadcaster and turned it into a government mouthpiece.

A serious case of self-doubt

The ABC Act and the ABC Charter are the safeguards of ABC’s independence from the government of the day. This independence was challenged to unprecedented levels by the Abbott government a few years ago.

Read more:
Crude tone of attacks is new, but softening up the ABC for cuts isn’t

A new major challenge to the ABC’s independence is the current change, driven by One Nation, to the ABC Charter requiring it to be “fair” and “balanced” in its reporting. If you recognise these terms, that’s because it used to be Fox News’ catchphrase.

Read more:
How the government and One Nation may use media reforms to clip the ABC’s wings

The ABC is not turning into the Polish Broadcasting Corporation, but it has clearly lost a lot of confidence lately. In Alberici’s case, it appears it bowed to government pressure when it should have stood its ground.

But getting heat from the government of the day (regardless of the particular side of politics) is an indication that a public broadcaster is doing its most important job (provided you get your facts right): holding power to account. If you bow to political pressure, you’re not doing your job.

A public broadcaster with a confidence problem is a serious issue for political and democratic wellbeing.

Globally, there are between ten and 15 properly funded public broadcasters (depending on what level of funding you define as proper) with enough funding and safeguards to be able to call themselves editorially independent. This means there are only ten to 15 large repositories of in-depth public interest journalism – globally.

The ConversationSo, the case is strong for the Australian public to get behind the ABC and ask it to snap out of its crisis of confidence. Then it can get on with the job of keeping power to account – just like Alberici tried to do.

Johan Lidberg, Associate Professor, School of Media, Film and Journalism, Monash University

This article was originally published on The Conversation. Read the original article.